Selling your home means a lot of exciting changes, but one thing you may not know can be affected: your taxes for 2020. If you sell a home, you typically receive a one-time influx of money that can have a major impact on how much you owe on your taxes, depending on your tax status and home price. But will this year’s selling of your home impact your taxes for 2020? The answer may be somewhat complicated.
Capital Gains Tax
The money you earn from the sale can be considered as revenue under the tax on capital gains when you sell your home. This extra income will drive some people into the next tax bracket, which means they end up owing much more money than anticipated.
WHAT IS THE CAPITAL GAINS TAX?
The tax on capital gains is a tax levied on selling Placerville a major asset. It is determined only on the basis of the money you receive, so it takes the original purchase price into account and how much you sold it.
Up until 1997, if you were at least 55 years old and sold your primary residence, you had the option of a one-time capital gains tax exemption of up to $125,000.
Nevertheless, the new rule restricts up to $250,000 for a single person or up to $500,000 for a married couple on the sales price of your primary residence.
That means, if you meet certain criteria, selling your Placerville home means you won’t see any impact on your 2019 taxes.
QUALIFYING FOR THE CAPITAL GAINS TAX EXEMPTION
To qualify for a capital gains tax exemption, the sale of your home must meet certain criteria.
According to the IRS, here are the three conditions you will meet:
-
Have owned the house for two years or more
-
Have lived at home for at least two years as your primary residence
-
Have not excluded income from the selling of another house for a period of two years ending on the date of the sale of the house you want to exclude from your 2020 tax
If during the past two years you have leased your home for part of the year, you may only be able to exclude a portion of your earnings from the selling of the home in proportion to the amount of time you spent in the year you lived at home.
HOW ARE GAINS AND LOSSES CALCULATED?
Calculating how much you earned by selling your home takes into account a few factors: how much you originally paid for it, how much you sold it for it, and the value of any changes you made to your property.
In addition to the removal of products such as the roof and siding, eligible home improvements include upgrades and repairs to bedrooms, kitchens, bathrooms and other spaces. Even qualify are home security devices, lawn sprinklers and improvements to the HVAC system.
Though, you can’t count them as valid home improvements if you make repairs or enhancements necessary to keep your home in good repair.
Improvements made but removed later, such as flooring, as well as improvements with a life expectancy of less than a year built do not count.
Once you work out your capital gains, you start by taking your home’s initial purchase price and adding to the cost of any upgrades to the home.
Therefore, if you originally bought your home for $200,000 and spent $50,000 on renovations, your cost base is $250,000.
Then take the selling price and subtract from the real estate agent any commissions paid. To get your capital gains, take that number and subtract your cost base.
When you sold your house for $300,000 and paid a fee of $3,000, your selling price is deemed to be $297,000 for this estimate. So deduct the $250,000 cost base to earn $47,000 in capital gains.
In this case, capital gains would not affect the taxes for 202020 because the amount for a person is less than $250,000 or $500,000 for a couple.